South Africa Bond Yields Fall to Record Low on Rate Bets

June 13 (Bloomberg) -- South African bonds gained, driving
three-year yields to a record low, on speculation the central
bank will cut interest rates after retail sales grew at the
slowest pace two years. The rand was little changed.

Yields on the nation’s 13.5 percent bonds due 2015 fell six
basis points, or 0.06 percentage point, to 6.18 percent, at 4
p.m. in Johannesburg, the lowest on a closing basis on record,
according to data compiled by Bloomberg. South Africa’s currency
appreciated less than 0.1 percent to 8.3987 per dollar.

Sales rose 1 percent from a year earlier, down from a
revised 6.7 percent in March, Pretoria-based Statistics South
Africa said on its website today. The median estimate in a
Bloomberg survey of 11 economists was 4.1 percent. Three-month
forward-rate agreements used to bet on interest rates fell to
the lowest since November.

“The probability of a rate cut has arisen” given the
downside risks to growth, Tebogo Mosepele, a Johannesburg-based
analyst at Standard Bank Group Ltd., wrote in e-mailed comments.

The forward-rate agreements starting in December dropped
eight basis points to 5.27 percent today, the lowest November.
The rate is 32.5 basis points below the three-month Johannesburg
Interbank Agreed rate, or Jibar, indicating traders see a two-thirds probability of a rate cut by the year-end.

Two-year interest-rate swaps, the fixed borrowing cost
between banks and a gauge of investors’ expectations of average
short-term rates in the next two years, dropped six basis points
today to 5.50 percent, level with the central bank’s benchmark
repo rate. The swap rate has declined from 6.21 percent as
recently as March 21.

Repo Rate

The South African Reserve Bank has left its benchmark repo
rate at 5.5 percent since November 2010 to support the economy
even as the inflation rate lifted above the 6 percent target.
Consumer prices have peaked and are likely to fall back within
the target range this month, Reserve Bank Governor Gill Marcus
said on May 24.

South Africa’s inflation rate increased 6.1 percent in
April, less than the median estimate of 6.2 percent forecast by
18 economists surveyed by Bloomberg.

The rand gained as much as 0.5 percent earlier after
Japanese machinery orders rose more than three times the pace
estimated by economists, boosting the price of metals including
copper. Metals and other commodities account for 45 percent of
South Africa’s exports, according to government data.

“The focus remains on developments abroad,” Quinten
Bertenshaw, a Johannesburg-based analyst at Tradition Analytics,
wrote in e-mailed comments. “Given all that is set to unfold in
coming trading sessions and the amount of bad news already
priced in, traders will be reluctant to sit on any significant
trading positions.”

Greece holds elections June 17 that may determine its
future in the euro area, which buys about a fifth of South
Africa’s exports. Borrowing costs increased at debt auctions in
Germany and Italy today after Spanish bond yields rose to a
euro-era record yesterday.